The US dollar had a good start in 2024, rising from around 101 to a peak of 103.60, reclaiming most of the lost territory from the December decline. This can be attributed to the performance of the U.S. economy, inflation, and officials' speeches during this period, leading to a significant shift in market expectations for a Fed rate cut.

In the previous month, the author pointed out that the market's expectations for a U.S. rate cut seemed too high. At that time, the market did not think that the Fed would actively cut rates as early as March, with a total of six rate cuts and a cumulative cut of 125 basis points for the whole year, a significant difference from the Fed's December dot plot forecast of three cuts. This briefly pushed the US Dollar Index towards the 100 level. However, entering January, indicators such as job market performance, consumer confidence, retail sales, and housing data reflect the resilience of the U.S. economy. Inflation has begun to rise after a continuous decline, raising concerns about a potential global resurgence of inflation. Additionally, with Fed officials stating their reluctance to support an early rate cut, the latest predictions from the interest rate futures market suggest that the likelihood of a rate cut in March may fall to around 50%, aligning with the possibility of maintaining the current interest rate. 

The market is starting to recognize that with the increased possibility of a soft landing for the U.S. economy, the Fed's pace of relaxing monetary policy to prevent a rise in inflation will be more cautious. Furthermore, other economies, such as the Eurozone, despite maintaining a similar vigilance against inflation, face weaker fundamentals than the U.S. and even a risk of recession. The ECB President recently indicated the possibility of a rate cut before July. Since turning down from the 1.1150 level at the end of last year, the Euro has struggled to even surpass 1.10. For short-term investors, you may try with the 1.07 level. As for the US Dollar Index, there is not ruled out the possibility of further upside, but it’s important to note that there will be considerable resistance at 104.50, we can make small adjustments if it is close to 104.

The Bank of Japan, after its interest rate meeting on January 23, announced that it would maintain interest rates and forward guidance unchanged. At the same time, it lowered the median inflation forecast for fiscal year 2024 from 2.8% to 2.4%, while raising the economic growth forecast from 1% to 1.2%. During the subsequent press conference, Governor Kazuo Ueda stated that the central bank would decide whether an adjustment to monetary policy is necessary based on inflation conditions. The confirmation of a virtuous cycle between prices and wages is crucial, requiring several more months to collect additional information. As wage negotiations for this year are still ongoing during the March meeting, the market believes that the central bank is unlikely to adjust its monetary policy until April. As the Bank of Japan continuing to maintain patience, the Japanese yen exchange rate has not seen a breakthrough and remains fluctuating around 148. However, it is believed that the central bank will take action in the second quarter, first ending negative interest rates and gradually raising interest rates. The Japanese yen remains promising for the year.

Patrick Law

Chief Operating Officer of Hantec Group